Conflict roils ANS

Israel/Hezbollah firefight ups ANS to $81.85; demand worries pare gain

Steve Sutherlin

Petroleum News

Alaska North Slope crude capped a volatile five-day trading stretch Aug. 28 by giving up $1.34 to depart the $80s and close at $79.07 per barrel. West Texas Intermediate lost $1.01 on the day to close at $74.52 and Brent lost 90 cents to close at $78.65.

(See chart in the online issue PDF)

The immediate factor seen for lower prices Aug. 28 was a lower-than-expected drawdown in U.S. commercial crude supplies, atop a continued concern over demand in China.

Suspicions of weakening China demand were supported by a shrinking ANS premium over Brent, which narrowed the gap between the two benchmarks to just 42 cents on Aug. 28.

Absent the demand pull of Asian spot purchases of Pacific Ocean cargoes, ANS West Coast prices are likely to track closer to Brent.

Aug. 27 also was a down day which abruptly reversed a three-day crude price surge -- ignited by Middle East hostilities -- that added more than 6% to the ANS price.

ANS plunged $1.44 Aug. 27 to close at $80.40, while WTI plunged $1.89 to close at $73.53 and Brent plunged $1.88 to close at $79.55.

On Aug. 26, ANS leapt $2.10 higher to close at $81.85, WTI vaulted $2.59 to close at $77.42 and Brent vaulted $2.41 to close at $81.43.

The price jump came after a weekend exchange of heavy fire between Israel Lebanon-based militant group Hezbollah. Israel scrambled some 100 fighter jets to preemptively hit missiles, drones and other military assets in Lebanon, and Hezbollah launched hundreds of missiles and drones into Israel.

The fighting heightened fears that the conflict between Israel and Hamas in Gaza might escalate into a wider regional war, which could disrupt oil production and exports amongst major oil producing neighbors of the two countries.

Crude prices were further stoked on supply concerns as oilfields in eastern Libya were shut down due to internal conflict rising between warring factions in the country.

The loss of Libyan exports threatens to remove some 1 million barrels per day of supply from the market.

ANS jumped $1.77 Aug. 23 to close at $79.75, as WTI jumped $1.82 to close at $74.83 and Brent Jumped $1.80 to close at $79.02

On Aug 22, ANS rose 99 cents to close at $77.99, WTI rose $1.08 to close at $73.01 and Brent gained $1.17 to close at $77.22.

Aug. 22 gains were spurred as expectations for a September U.S. interest rate cut rose after minutes of the Federal Reserve's July meeting showed most Fed officials thought a rate cut was warranted.

U.S. commercial crude oil inventories for the week ended Aug. 23 -- excluding the Strategic Petroleum Reserve -- were drawn down by 0.8 million barrels from the previous week to 425.2 million barrels, 4% below the five-year average for the time of year, the U.S. Energy Information Administration said in its weekly update Aug. 28.

Analysts in a Reuters poll called for a draw of 2.3 million barrels.

Total motor gasoline inventories fell by 2.2 million barrels over the week to 218.4 million barrels -- 3% below the five-year average for the time of year, the EIA said. Distillate fuel inventories rose by 0.3 million barrels for the period to 123.1 million barrels -- 10% below the five-year average for the time of year.

A Russian oil facility was damaged by the longest-range drone attack during the Russia/Ukraine war, EA Worldview said in an Aug. 28 post. The drone struck an oil products reservoir in Kotelnich in the Kirov region, more than 745 miles from the Ukrainian border.

A Ukrainian military intelligence official claimed responsibility for the operation, EA said. "The Zenit oil depot is a facility of the enemy military-industrial complex and provides fuel to the Russian occupation forces," the official said.

From Wednesday to Wednesday, ANS gained $2.07 from its close of $77.00 Aug. 21 to a close of $79.07 Aug. 28. ANS traded at a $4.55 premium over WTI on Aug. 28.

Shale producers up 2024 targets

Upward revisions from operators including Diamondback Energy, Devon Energy and Permian Resources are "modest for the most part," but may affect plans of the Organization of the Petroleum Exporting Countries to begin reversing a combined 2.2 million bpd of production cuts in the fall, Argus said.

"With domestic energy production a key topic in the 2024 U.S. presidential election and OPEC+ perhaps having prematurely expected lower shale oil volumes, (second quarter) earnings serve as a reminder that shale will continue to be a growing, albeit perhaps more predictable, supply source on the global stage," Rystad Energy senior analyst Matthew Bernstein said.

Overall U.S. crude production growth is expected to slow in 2024 after last year's 1 million bpd gain defied all expectations, but improvements that have sped up the drilling process are helping operators get more bang for their buck, Argus said.

Gains have come from drilling 3-mile lateral wells along with the adoption of electric fracking fleets, which increased pumped hours and led to faster cycle times when it comes to well completions, Argus said.

Healthy competition among crews is driving productivity gains, Devon Energy said.

"We rack and stack all 16 rigs every day on how they're doing," Devon COO Clay Gaspar said. "There's a first place and there's a last place ... and those companies know, those engineers know exactly where they stand."